Since Berkshire’s recent 13F showed an ownership of Taiwan Semiconductor, it made me want to dig deeper into the company. TSMC is one of the largest integrated circuit fabricators in the world, and one of the few that can mass produce the most cutting edge chips. In this post I will try to get a high level overview of TSMCs capital allocation by studying their use of cash.
Cash Flow Summary
The first place to look in order to get a high level understanding of TSMCs capital allocation is to look at their main uses of cash for the past several years. Cash from operations seemed stable from 2017-2019, but has been growing at a high rate the past few years. The cash from operations in the first 9 months of 2022 is already approximately equal to the 2021 value.
Looking at the operating cash flow numbers, and some of the other line items discussed later, it seems like TSMCs recent results can be split into two regimes: the 2017-2019 period, then the 2020-present that had much higher growth.
Cash spent on investments was initially about 50% of cash from operations, but lately it has grown to about 70%. Clearly investments have been ramping up.
Cash outflows for financing grew modestly and peaked in 2019. Since then, cash from financing has deviated from its norm. As we’ll see later, this is due to TSMC issuing debt that counteracted their dividend payments.
Finally, 2017 and 2018 saw minimal changes in the net cash position of the company. The net change in cash was moderately negative in 2019 due to the increased investments. Since then, TSMC has been building cash from increased operating cash flow and debt issuance.
9 Months 2022
2021
2020
2019
2018
2017
Cash from Operations
38,374
40,200
29,280
20,520
18,670
19,670
Cash from Investing
(29,972)
(30,2300)
(18,000)
(15,310)
(10,220)
(11,300)
Cash from Financing
(4,454)
4,940
(3,150)
(8,990)
(7,970)
(7,250)
Net Change in Cash
7,889
14,630
7,290
(4,080)
794
407
Cash from Investing
The biggest component to TSMCs cash from financing is capital expenditures. Taiwan Semi has been expanding manufacturing capacity by building new fabs. Additionally, the company has to constantly upgrade machinery and existing fabs to handle each new generation of transistor sizes. Capex was consistent in 2017 and 2018, then showed a decent increase in 2019 and 2020. TSMC greatly increased capex spend in 2021, and looks to rival that spend in 2022. A deeper dive would be required to see if TSMC generates high returns from their investments in capital expenditures.
The other main line items in the cash from investing are the purchase and sale of investments. These two line items generally cancel each other out, as if TSMC is rolling over bonds or rebalancing their stock portfolio. However, so far in 2022, Taiwan Semi has purchased more investments than what they have disposed of.
9 Months 2022
2021
2020
2019
2018
2017
Capital Expenditures
(25,470)
(30,330)
(18,050)
(15,360)
(10,270)
(11,110)
Purchase of Investments
(5,900)
(9,367)
(9,509)
(8,622)
(3,230)
(3,500)
Sale of Investments
2,112
9,536
9,510
8,247
2,930
2,950
Cash from Investing
(28,972)
(30,230)
(18,000)
(15,310)
(10,220)
(11,300)
Cash from Financing
Now to look at Taiwan Semiconductor’s use of cash for financing. TSMC was paying off about $1B in debt in 2017 and 2018, then debt payments trickled in 2019. Debt issuance largely increased in 2021, coinciding with the large capex spend. The change in debt so far in 2022 shows a modest increase in debt.
TSMCs long term debt to equity ratio comes in at 0.3, and their D/EBIT is about 0.97. These debt ratios indicate that Taiwan Semi has pretty low amounts of debt, implying that they have not grossly misallocated capital in the past.
As for returning capital to shareholders, TSMC has done practically no share buybacks. Interestingly, they diluted investors a bit by issuing stock in 2021. It would be worth investigating if the proceeds were used fund investments, or something else like stock based compensation.
Instead of buying back stock, Taiwan Semi has been steadily paying dividends. The company has roughly paid dividends that amount to about 30% of operating cash flow. With this modest payout, it seems TSMC is caught between returning capital to shareholders, while also reinvesting in the business.In my opinion, if the company is growing at a high rate, and heavily reinvesting in the business with high incremental returns, they should minimize their dividend payments.
9 Months 2022
2021
2020
2019
2018
2017
Net Change in Debt
2,600
14,440
6,240
(124)
(1,120)
(1,030)
Issuance of Equity
0
341
0
0
0
0
Repurchase of Equity
(30)
(4)
0
(3)
(3)
(4)
Dividend Paid
(7,306)
(9,610)
(9,230)
(8,650)
(6,750)
(6,100)
Cash from Financing
(4,454)
4,940
(3,150)
(8,990)
(7,970)
(7,250)
Conclusion
The main takeaways from this quick analysis is that Taiwan Semiconductor has greatly increased cash from operations over the past few years, while also ramping up capital expenditures. I found it interesting that TSMC focuses solely on dividends to return cash to shareholders, instead of performing buybacks. Some next steps to dig deeper into TSMCs capital allocation is to get a better handle of what their capex spending goes towards, and to take a look at their R&D spend to see if that has been a driver for growth.
For Q2 2022, the portfolio was down 9.15%, and down 13.66% YTD. The Q2 starting balance was $168,049.53, and finished the quarter at $162,469.10. Contributions to the portfolio during the quarter amounted to $14,696.
This quarter I want to try something new by breaking out the results of just the individual stocks that I own. The performance of just the individual stocks will certainly have more volatility than the overall multi-asset portfolio, which can be a benefit or at times a hindrance. I may phase out of reporting my full multi-asset portfolio to just focus on the individual stocks. However, I have not made up my mind on this.
The Q2 starting balance was $76,209.80, with an ending balance of $71,930.35. For the return calculation, I am considering stocks sold during the month as negative cash flow (like a distribution), and purchasing a stock is cash flow positive (money coming in), dividends are treated as distributions as well. Therefore the net cash flow for Q2 was $6,005. Putting all of this together means the portfolio was down 13.3% for Q2, and is down 14.2% YTD.
Three new stocks were bought this quarter: Williams-Sonoma (WSM), Omnicom Group (OMC), and BASF (BASFY). I added to my position in Warner Bros Discovery by buying 50 more shares. Stocks that were sold this quarter include Quidel (QDEL), B2Gold (BTG), Madison Square Garden Entertainment (MSGE), and Biogen (BIIB). The rolling over of tail hedge put options continued.
The current allocation of the portfolio is shown in the chart below. Currently, the portfolio consists of discretionary value stocks, oil tankers, deep value, 401k stocks, precious metals, and cash. It can be seen that 81.4% of the portfolio is in stocks, while 18.6% is in cash and safe haven assets.
During the quarter I received $486.53 total in dividends, which is broken down in the table below.
Ticker
Quarterly Dividend
FE
48.75
BTI
129.28
GTN
10.80
STNG
6.80
BCC
114.1
DHT
4.30
ITIC
5.52
EMR
43.78
COF
33.00
SPG
75.90
KOP
9.40
HXL
4.90
Total
486.53
Discretionary Summary
Discretionary value is the label I’m giving to the positions that are fairly large (~5% of the portfolio) I believe are undervalued and may have the following characteristics: quality business, competitive advantage, misunderstood by the market, or a good company in a heavily sold off industry. The current discretionary value stocks I own consist of Capital One Financial (COF), Emerson Electric (EMR), Simon Property Group (SPG), FirstEnergy (FE), British American Tobacco (BTI), Qurate Retail (QRTEA), and Warner Bros Discovery (WBD). The table below shows the cost basis, current value, and gains/losses for these positions.
During the second quarter, Discovery Inc. finalized their merger with Warner Media, forming Warner Bros Discovery. I think WBD can use the cash generated by the linear TV advertising to transition into one of the top streaming platforms.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
COF
63.25
3,478.75
5,730.45
64.73%
EMR
41
3,485.00
6,760.90
94.00%
SPG
74.5
3,427.00
4,366.32
27.41%
FE
28
3,500.00
4,798.75
37.11%
BTI
37.45
7,114.91
8,152.90
14.59%
QRTEA
7.6
5,700.00
2,152.50
(62.24%)
WBD
22.53
4,957.00
2,952.40
(40.44%)
Deep Value
Deep value is a sub-strategy I’m employing in my portfolio. This is a quantitative strategy that buys a basket of statistically cheap stocks. The metric I use is EV/EBIT, based on the wonderful book The Acquirers Multiple. Historically, this strategy has provided excellent returns, although it has not kept up with the S&P 500 the past few years. Additionally, I am making an effort to apply this strategy to microcap companies. Microcaps are classified as having a market capitalization between $50M-300M. These small companies are more volatile, but have the potential for attractive returns.
My position sizing is smaller than the discretionary side of my portfolio because I want to own a basket of about 20 stocks. Since this is a quantitative strategy, I do not spend much time analyzing these businesses. The main idea is that these companies are trading at very cheap valuations, and the winners will (hopefully) outnumber the losers.
The new additions to this part of the portfolio are Williams-Sonoma, Omnicom Group, and BASF.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
BCC
55.00
3,025.00
3,271.95
8.16%
GTN
23.00
3,105.00
2,280.15
(26.57%)
HXL
36.80
1,803.20
2,563.19
42.15%
ITIC
164.54
1,974.48
1,882.68
(4.65)
KOP
31.47
2,958.18
2,128.16
(28.06%)
MHO
60.00
2,520.00
1,665.72
(33.90%)
SENEA
50.00
3,000
3,332.40
11.08%
WSM
115.00
5,175.00
4,992.75
(3.52%)
OMC
65.86
4,610.37
4,452.70
(3.42%)
BASFY
11.54
4,269.80
4033
(5.55%)
Four of the deep value positions were sold this quarter due to the one year holding period. The table below summarizes the realized gains and losses. In this case, they are all losses. Obviously this is not preferred, but I do not think this batch of losers is indicative of a flawed strategy.
Cost Basis
Sale Proceeds
Realized Gain (Loss)
BTG
2,499.00
2,379.92
(4.8%)
BIIB
2,475.00
1,937.77
(21.7%)
MSGE
2,000.00
1,698.46
(15.1%)
QDEL
2,520.00
2,414.97
(4.2%)
Tanker Stocks
The tankers have seen a recovery lately, with Scorpio Tankers finally showing a gain.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
DHT
8.17
1,755.90
1,317.95
(24.94%)
FRO
10.66
1,738.29
1,444.18
(16.92%)
STNG
26.63
1,742.67
2,346.68
34.66%
TNK
23.86
1,765.88
1,304.62
(26.12%)
401k and Precious Metals
My 401k is through my current employer and actively receives contributions. The 401k consists of a Blackrock Target Date Fund (which is no longer being funded), and the Oakmark Fund. The Oakmark Fund is a large cap value fund. Since I am actively contributing to my 401k, it will naturally have a growing influence on my portfolio.
I also have a decent allocation to precious metals that are used as a bond substitute, recession and inflation hedge. The table below shows the YTD performance for the precious metals and 401k, which includes the effects of contributions.
12/31/21
06/31/22
YTD Gain (Loss)
YTD Contributions
Precious Metals
12,854.19
12,019.64
5.96%
0
401k
60,578.76
63,924.8
(19.62%)
3,696.00
Tail Hedging
This quarter I continued a tail hedging strategy that I have used in the past. The strategy involves buying 30% out of the money SPY put options that expire in a couple of months. Each month options are sold and a new set is bought. This quarter, the options have had a cost of $1,582.70, with proceeds of $891.81, leaving a net cost of $690.89.
For Q1 2022, the portfolio was down 2.63%. The Q1 starting balance was $159,295.45, and finished the quarter at $171,035.25. Contributions to the portfolio during the quarter amounted to $16,087.
No stocks were bought or sold during the quarter. However, the rolling over of tail hedge put options continued.
The current allocation of the portfolio is shown in the chart below. Currently, the portfolio consists of discretionary value stocks, oil tankers, deep value, 401k stocks, precious metals, and cash. It can be seen that 84% of the portfolio is in stocks, while 16% is in cash and safe haven assets.
During the quarter I received $393.172 total in dividends, which is broken down in the table below.
Ticker
Quarterly Dividend
FE
48.75
BTI
138.68
GTN
10.80
BTG
19.04
STNG
6.80
BCC
6.60
DHT
4.30
ITIC
5.52
EMR
43.78
COF
33.00
SPG
75.90
Total
393.17
Discretionary Summary
Discretionary value is the label I’m giving to the positions that are fairly large (~5% of the portfolio) I believe are undervalued and may have the following characteristics: quality business, competitive advantage, misunderstood by the market, or a good company in a heavily sold off industry. The current discretionary value stocks I own consist of Capital One Financial (COF), Emerson Electric (EMR), Simon Property Group (SPG), FirstEnergy (FE), British American Tobacco (BTI), Qurate Retail (QRTEA), and Discovery Inc. (DISCK). The table below shows the cost basis, current value, and gains/losses for these positions.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
COF
63.25
3,478.75
7,220.95
107.57%
EMR
41.00
3,485.00
8,334.25
139.15%
SPG
74.50
3,427.00
6,051.76
76.59%
FE
28.00
3,500.00
5,732.50
63.79%
BTI
37.45
7,114.91
8,010.40
12.59%
QRTEA
7.60
5,700.00
3,570.00
(37.37%)
DISCK
24.50
4,165.00
4,244.90
1.92%
Deep Value
Deep value is a sub-strategy I’m employing in my portfolio. This is a quantitative strategy that buys a basket of statistically cheap stocks. The metric I use is EV/EBIT, based on the wonderful book The Acquirers Multiple. Historically, this strategy has provided excellent returns, although it has not kept up with the S&P 500 the past few years. Additionally, I am making an effort to apply this strategy to microcap companies. Microcaps are classified as having a market capitalization between $50M-300M. These small companies are more volatile, but have the potential for attractive returns.
My position sizing is smaller than the discretionary side of my portfolio because I want to own a basket of about 20 stocks. Since this is a quantitative strategy, I do not spend much time analyzing these businesses. The main idea is that these companies are trading at very cheap valuations, and the winners will (hopefully) outnumber the losers.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
BCC
55.00
3,025.00
3,829.00
26.29%
BIIB
275.00
2,475.00
1,895.40
(23.42%)
BTG
5.25
2,499.00
2,184.84
(12.57%)
GTN
23.00
3,105.00
2,979.45
(4.04%)
HXL
36.80
1,803.20
2,914.03
61.60%
ITIC
164.54
1,974.48
2,438.52
23.50%
KOP
31.47
2,958.18
2,586.88
(12.55%)
MHO
60.00
2,520.00
1,862.70
(26.08%)
MSGE
95.24
2,000.00
1,749.51
(12.52%)
QDEL
120.00
2,520.00
2,361.66
(6.28%)
SENEA
50.00
3,000.00
3,092.40
3.08%
Tanker Stocks
Tankers are still trading a lot lower than my purchase price. I wouldn’t be opposed to selling these stocks. In the medium term, oil tankers should recover once oil demand rebounds from the pandemic.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
DHT
8.17
1,755.90
1,247.00
(28.98%)
FRO
10.66
1,738.29
1,434.00
(17.48%)
STNG
26.63
1,742.67
1,434.40
(16.57%)
TNK
23.86
1,765.88
1,024.16
(42.00%)
401k and Precious Metals
My 401k is through my current employer and actively receives contributions. The 401k consists of a Blackrock Target Date Fund (which is no longer being funded), and the Oakmark Fund. The Oakmark Fund is a large cap value fund. Since I am actively contributing to my 401k, it will naturally have a growing influence on my portfolio.
I also have a decent allocation to precious metals that are used as a bond substitute, recession and inflation hedge. The table below shows the YTD performance for the precious metals and 401k, which includes the effects of contributions.
12/31/21
12/31/21
YTD Gain (Loss)
YTD Contributions
Precious Metals
12,854.19
13,620.52
5.96%
0
401k
60,578.76
63,924.8
(4.23%)
9,087.14
Tail Hedging
This quarter I continued a tail hedging strategy that I have used in the past. The strategy involves buying 30% out of the money SPY put options that expire in a couple of months. Each month options are sold and a new set is bought. This quarter, the options have had a cost of $2,469.39, with proceeds of $1,152.97, leaving a net cost of $1,316.42.
For Q4 2021, the portfolio was up 2.7%, and finished the year up 20.6%. The Q4 starting balance was $146,562.65, and finished the quarter at $159,295.45. Contributions to the portfolio during the quarter amount to $9,390. The starting balance of the portfolio at the start of 2021 was $111,461.88. Total contributions to the portfolio for the year was $23,590, where $17,590 of that was 401k contributions.
A few new positions were added this quarter in several of the portfolio categories. On the discretionary side, Discovery Inc. (DISCK), and Qurate Retail (QRTEA) was purchased. The Deep Value category saw the addition of Boise Cascade Company (BCC), Gray Television (GTN), Seneca Foods Corp (SENEA), Koppers Holdings (KOP). This quarter saw more rebalancing of the precious metal holdings with additional purchase of the SLV silver ETF.
The current allocation of the portfolio is shown in the chart below. Currently, the portfolio consists of discretionary value stocks, oil tankers, deep value, 401k stocks, precious metals, and cash. It can be seen that 86.9% of the portfolio is in stocks, while 13.1% is in cash and safe haven assets.
During the quarter I received $1,397.62 total in dividends, which is broken down in the table below. The boost in dividends this quarter was due in large part to the special dividends paid by QRTEA, BCC, and ITIC. Total dividends received for the year amounted to $2,447.91.
Ticker
Quarterly Dividend
QRTEA
625.00
FE
48.75
BTI
137.13
GTN
10.80
BTG
19.04
STNG
6.80
BCC
171.60
DHT
4.30
ITIC
221.52
EMR
43.78
COF
33.00
SPG
75.90
Total
1,397.62
My Thoughts
One of the biggest financial stories this year was the meme stock phenomenon. AMC theaters and Gamestop were the two high profile meme stocks. In both cases, these companies were shorted by a few hedge funds. A group of amatuer speculators who gathered on Reddit were trying to create a short squeeze to cause large losses to the hedge funds, thereby sticking it to the man. Part of the motivation for the Reddit crowd was to inflict financial pain on firms involved with “payment for order flow”, and because they thought the hedge funds were intentionally trying to kill the meme stocks by shorting them. Also there was the promise of great riches if the Redditors did pull off the short squeeze.
The Reddit crowd had an arcane thesis on how to pull off the short squeeze, and to explain why the “mother of all squeezes” hasn’t happened yet, going on months, despite the hedge funds supposedly bleeding from the interest payments on their shorts. Support for this thesis included:
A get rich quick narrative
Complex financial terminology such as dark pools and naked short selling
Anecdotal evidence such as the Redditors control a large portion of the shares outstanding, and that the hedge funds interest payments are killing them
Logical fallacies such as ascribing the causation of a company going bankrupt due to short selling
Lucky for me, my investing strategy does not involve knowing what dark pools and naked shorting are. I basically try to buy boring, out of favor, maybe even hated stocks with the belief that eventually the market will forget why the company is out of favor. Most people would think it is no fun bragging to friends and family about owning shopping malls, HVAC equipment manufacturers, or electric utilities.
A key part of my investing philosophy is thinking in terms of years (sometimes decades) instead quarterly or long enough to make a quick buck. The power of compound interest is miraculous, however it takes years to appreciate its effects. It almost seems like it is a genetic mutation to be able to delay gratification, to be able to hold investments for the long term to let them compound. The simple recipe to do well financially is to live below your means, then invest your savings and not mess with it. Now I understand that it is easier said than done for some socio-economic cohorts, but the goal should be to make it practical for everyone to be able to save and invest. Unfortunately, we are all susceptible to get rich quick schemes. I am not too concerned about the person who throws a small amount of their money into this meme stock mania. What is more worrisome is the speculator who loses a substantial amount of their money, blames the system, and swears off the stock market…forgoing the tool of long term compounding.
Another big finance story this year was inflation. While pessimists have been calling for inflation for the past 10 years, now every day there is a news article discussing inflation. Much of the talk has been whether or not the price increases are “transitory”. I think the use of the word transitory is misleading, it implies that prices have risen, but will fall back to where they were. What economists and the Federal Reserve really mean is the rate of change in inflation is transitory, meaning the inflation rate goes from 2% to 7% back down to 2%. A large part of the inflation is due to the complex system that is our supply chains, where one bottleneck has massive ripple effects. Hopefully the supply chain works itself out soon, and luckily the fear mongers were wrong: we didn’t have any trouble getting our Christmas presents.
The other aspect of the inflation story is the labor shortages, which is a complicated topic. People can debate the pros and cons to the quickly rising wages, but what is certain is that the wage increases are not transitory. While I do not want to predict how long high inflation will persist, the point is that 2021 definitely experienced inflation.
Here is an example of the sting felt by this year’s 7% inflation print: I purchased British American Tobacco at an attractive 8% dividend yield, but real terms that is only a paltry 1% yield this year. Now think of the hurt from the people who own bonds that yield less than 1%. Luckily, BTI should have the ability to pass on price increases to its customers. Owning companies that have pricing power is one of the best ways to fight inflation.
In my strategy, I do not go out of my way to purchase investments to hedge inflation. However occasionally there is an overlap between a company that is undervalued and also has some degree of pricing power. These scenarios are a win-win. The investments in my portfolio that should navigate an inflationary environment reasonably well include British American Tobacco, Simon Property Group, oil tankers, precious metals, and potentially Capital One and First Energy.
In the past few years, Environment-Social-Governance (ESG) investing has increased in popularity. While I think businesses should be mindful of their ESG impact, I am not sure that there needs to be labels or a rating attached to companies. My impression is that many companies operate with short term thinking, like making sure next quarters earnings hit analyst projections. I would rather have companies focus on the long term, which should benefit the long term owners of that business. Perhaps I am being naive, but it would seem that a company needs to factor in all stakeholders to be successful over many decades, or else Karma would set them straight.
Another issue I have with the ESG movement is that Wall Street jumps in to create ESG funds that charge higher fees than a generic index fund. Oftentimes the holdings of the ESG fund are nearly identical to the broad index! With the rise of ESG funds, certain stocks and industries see increased buyers of their stock, while other industries are left behind. These companies left behind could present opportunities to investors. It is usually a good strategy to fish where no one else is fishing.
Discretionary Summary
Discretionary value is the label I’m giving to the positions that are fairly large (~5% of the portfolio) I believe are undervalued and may have the following characteristics: quality business, competitive advantage, misunderstood by the market, or a good company in a heavily sold off industry. The current discretionary value stocks I own consist of Capital One Financial (COF), Emerson Electric (EMR), Simon Property Group (SPG), FirstEnergy (FE), British American Tobacco (BTI), Qurate Retail (QRTEA), and Discovery Inc (DISCK). The table below shows the cost basis, current value, and gains/losses for these positions.
Emerson Electric and AspenTech Deal
The main piece of news this quarter was that Emerson announced a deal with the industrial software company AspenTech (AZPN). Emerson is providing AspenTech its industrial software subsidiaries, and $6B in order to have a 55% stake in the New AspenTech. New AspenTech will still be listed as (AZPN). After the deal, AZPN is expected to have FY 2020 revenues of $1.1B and EBITDA around $500M. The earnings of the new company will be consolidated to Emersons financials, so Emerson will directly benefit from any earnings growth the new company will experience. Usually Emerson buys entire companies, so they are mixing it up with this deal. Additionally, EMR has only been doing smaller acquisitions of late. In contrast, Emerson’s $6B outlay represents about 10% of their market cap. The deal is expected to close in the second quarter of 2022.
Discovery Inc. Purchase
The first addition to the portfolio this quarter was Discovery Inc. (DISCK). Discovery includes the cable TV station of the same name, as well as Food Network, HGTV, Animal Planet, plus others. The company has responded to declining cable viewership by introducing the Discovery+ streaming app. The bigger story is that Discovery is merging with Warner Media via a Reverse Morris Trust. Warner Media is currently a subsidiary of AT&T (T), and consists of Warner Brothers movie library and IP, HBO, and has HBO Max as a streaming option.
Warner’s movies and TV shows are big budget affairs, known for their quality. In contrast, Discovery’s main content is reality based TV shows that are cheap to make. These reality shows are nice background noise for a cable TV watcher who just wants to put on an entertaining show. Given this situation, it appears Discovery will have a tough time getting people to go out of their way to pay for their streaming content. However, Discovery’s reality based content coupled with Warner Media’s library of movies and TV shows should create a very strong package. It is possible Warner-Discovery could be in the top tier of streaming platforms in the coming years.
Despite all of this, investors seem to be quite pessimistic about Discovery, with its share price steadily decreasing ever since the merger was announced. I believe the negativity surrounding Warner-Discovery has to do with potential regulatory issues, complexity of the Reverse Morris Trust arrangement, the relatively high Debt/EBITDA the new company will have, and uncertainty in the war for streaming market share. I think the negativity is overblown, and that even if the deal did not pan out, DISCK would be undervalued. Additionally, the great capital allocator John Malone is a large shareholder of Discovery, and will be on the board of the new company. I don’t mind riding on people’s coattails…
Qurate Retail Purchase
The other large purchase this quarter is also involved in the John Malone complex of companies. This purchase was Qurate, which is a holding company that mostly consists of QVC and HSN cable TV channels. Shopping through cable TV would seem quite the melting ice cube with the trend of cord cutting and ecommerce, that is probably true. Despite these headwinds, Qurate’s sales primarily come from older women who may be slow to adapt to modern shopping. Additionally, a decent chunk of QRTEA’s sales come from “super users” who make many repeat purchases.
Even though Qurate’s bread and butter is cable TV, they are working on pivoting to the direct-to-consumer streaming model. Since the sentiment regarding Qurate is quite negative, the company trades at a price to free cash flow multiple of around 4, which is very cheap. The company’s capital allocation policy involves returning most of the cash flow back to shareholders instead of reinvesting in its low growth business. Qurate does not pay regular dividends, but pays a hefty special dividend. In my view, QRTEA will not shrink as fast as people think, and if they nail the landing with their streaming strategy then the business could be generating cash for years to come.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
COF
63.25
3,478.75
7,979.95
130.25%
EMR
41.00
3,485.00
7,902.45
126.76%
SPG
74.50
3,427.00
7,349.42
114.46%
FE
28.00
3,500.00
5,198.75
48.54%
BTI
37.45
7,114.91
7,107.90
-0.01%
QRTEA
7.60
5,700
5,700.00
0.0%
DISCK
24.50
4,165.00
3,893.00
-6.53%
Tanker Stocks
Tankers are still trading a lot lower than my purchase price. I wouldn’t be opposed to selling these stocks. In the medium term, oil tankers should recover once oil demand rebounds from the pandemic.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
DHT
8.17
1,755.90
1,115.85
-36.45%
FRO
10.66
1,738.29
1,152.41
-33.70%
STNG
26.63
1,742.67
871.08
-50.01%
TNK
23.86
1,765.88
806.60
-54.32%
Deep Value
Deep value is a sub-strategy I’m employing in my portfolio. This is a quantitative strategy that buys a basket of statistically cheap stocks. The metric I use is EV/EBIT, based on the wonderful book The Acquirers Multiple. Historically, this strategy has provided excellent returns, although it has not kept up with the S&P 500 the past few years. Additionally, I am making an effort to apply this strategy to microcap companies. Microcaps are classified as having a market capitalization between $50M-300M. These small companies are more volatile, but have the potential for attractive returns.
My position sizing is smaller than the discretionary side of my portfolio because I want to own a basket of about 20 stocks. Since this is a quantitative strategy, I do not spend much time analyzing these businesses. The main idea is that these companies are trading at very cheap valuations, and the winners will (hopefully) outnumber the losers.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
BCC
55.00
3,025.00
3,916.00
29.45%
BIIB
275.00
2,475.00
3,116.43
-12.76%
BTG
5.25
2,499.00
2,003.96
-25.14%
GTN
23.00
3,105.00
2721.6
-12.35%
HXL
36.80
1,803.20
3,057.60
40.76%
ITIC
164.54
1,974.48
2,095.56
19.82%
KOP
31.47
2,958.18
2942.2
-0.54%
MHO
60.00
2,520.00
2611.56
3.63%
MSGE
95.24
2,000
1477.14
-26.14%
QDEL
120.00
2,520.00
2834.79
12.49%
SENEA
50.00
3,000
2877
-4.10%
No deep value positions were sold this quarter. Additions to this section of the portfolio include Boise Cascade Company (BCC), Gray Television (GTN), Seneca Foods Corp (SENEA), Koppers Holdings (KOP).
401k and Precious Metals
My 401k is through my current employer and actively receives contributions. The 401k consists of a Blackrock Target Date Fund (which is no longer being funded), and the Oakmark Fund. The Oakmark Fund is a large cap value fund. Since I am actively contributing to my 401k, it will naturally have a growing influence on my portfolio.
I also have a decent allocation to precious metals that are used as a bond substitute, recession and inflation hedge. This quarter, I added another 49 units of iShares Silver Trust (SLV) at a cost basis of $21.71 a unit. The table below shows the YTD performance for the precious metals and 401k, which includes the effects of contributions.
12/31/20
12/31/21
YTD Gain (Loss)
YTD Contributions
Precious Metals
9,964.00
12,854.19
-2.91%
2,054
401k
32,252.43
60,578.76
26.96%
17,590.00
Tail Hedging
This quarter I reimplemented a tail hedging strategy that I have used in the past. The strategy involves buying 30% out of the money SPY put options that expire in a couple of months. Each month options are sold and a new set is bought. This quarter the options have had a cost of $1,652, with proceeds of $472, leaving a net cost of $1,180.
For Q3 2021, the portfolio is down 0.65%, and up 17.4% YTD. The Q1 starting balance was $144,722.98, and finished the quarter at $147,690.65. Contributions to the portfolio during the quarter amount to $3,948.
A few new positions were added this quarter in several of the portfolio categories. On the discretionary side, British American Tobacco (BTI) was purchased. The Deep Value category saw the addition of M/I Homes (MHO). Finally, SLV silver ETF was added to the precious metals holdings.
The current allocation of the portfolio is shown in the chart below. Currently, the portfolio consists of discretionary value stocks, oil tankers, deep value, 401k stocks, precious metals, and cash. It can be seen that 72.1% of the portfolio is in stocks, while 27.9% is in cash and safe haven assets.
During the quarter I received $231.90 total in dividends, which is broken down in the table below.
Ticker
Quarterly Dividend
FE
48.75
DHT
4.30
ITIC
5.52
EMR
42.93
COF
66.00
SPG
64.40
Total
231.90
Discretionary Summary
Discretionary value is the label I’m giving to the positions that are fairly large (~5% of the portfolio) I believe are undervalued and may have the following characteristics: quality business, competitive advantage, misunderstood by the market, or a good company in a heavily sold off industry. The current discretionary value stocks I own consist of Capital One Financial (COF), Emerson Electric (EMR), Simon Property Group (SPG), FirstEnergy (FE), British American Tobacco (BTI). The table below shows the cost basis, current value, and gains/losses for these positions.
The newest addition to the discretionary portfolio was the purchase of British American Tobacco. Cigarette volumes have been declining at a rate of 5% annually, and that trend is expected to continue. BTI is preparing for a “post-cigarette” world by developing alternative tobacco products that they claim is much more safe than combustables. While ESG funds are not allowed to own British American Tobacco, I don’t mind BTI’s 8% dividend yield.
Capital One recently announced they will enter the Buy-Now-Pay-Later (BNPL) space to compete with companies like Affirm. BNPL seems like a crowded space, so it will be interesting to see if COF can make an impact. With this announcement, it looks like I will be doing some homework on the competition..
First Energy announced their settlement with the DOJ concerning their bribery scandal. The company will pay $115 million to the US Treasury, and another $115 million to Ohio utility customers. These payments will be spread out over three years. With this scandal receding into the background, hopefully FE can revert to their pre-scandal price.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
COF
63.25
3,478.75
8,507.95
144.57%
EMR
41.00
3,485.00
8,180.40
134.73%
SPG
74.50
3,427.00
6,002.08
75.14%
FE
28.00
3,500.00
4,651.25
32.89%
BTI
37.45
7,114.91
6,703.20
(5.78%)
Tanker Stocks
Tankers have slightly improved this quarter, but are still a sore point in my portfolio. I wouldn’t be opposed to selling these stocks. However, I don’t have any better ideas, I already have a large cash position, and there is some hope they will work out in the medium term.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
DHT
8.17
1,755.90
1,395.35
-20.53%
FRO
10.66
1,738.29
1,467.00
-15.60%
STNG
26.63
1,742.67
1,499.40
-13.96%
TNK
23.86
1,765.88
1,067.08
-39.57%
Deep Value
Deep value is a sub-strategy I’m employing in my portfolio. This is a quantitative strategy that buys a basket of statistically cheap stocks. The metric I use is EV/EBIT, based on the wonderful book The Acquirers Multiple. Historically, this strategy has provided excellent returns, although it has not kept up with the S&P 500 the past few years. Additionally, I am making an effort to apply this strategy to microcap companies. Microcaps are classified as having a market capitalization between $50M-300M. These small companies are more volatile, but have the potential for attractive returns.
My position sizing is smaller than the discretionary side of my portfolio because I want to own a basket of about 20 stocks. Since this is a quantitative strategy, I do not spend much time analyzing these businesses. The main idea is that these companies are trading at very cheap valuations, and the winners will (hopefully) outnumber the losers.
Note: MSGN merged with MSGE during the quarter
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
BIIB
275.00
2,475.00
3,116.43
25.91%
BTG
5.25
2,499.00
2,003.96
-19.81
HXL
36.80
1,803.20
3,057.60
69.56%
ITIC
164.54
1,974.48
2,095.56
6.13%
MSGE
16.00
2,000.00
1,822.50
-8.88
QDEL
120.00
2,520.00
2,690.52
6.77%
MHO
60.00
2,520.00
2,427.60
(3.67%)
RSKIA, FF, and BBSI were sold this quarter since I’ve held them for a year. RSKIA and BBSI realized attractive gains, while FF produced a loss. Last quarter Future Fuel paid out a special dividend, which I received about $300. With this special dividend, my return with FF was closer to breaking even. The new addition this quarter was the home builder M/I Homes (MHO).
Cost Basis
Sale Proceeds
Realized Gain (Loss)
RSKIA
1,740.75
2,690.23
54.54%
FF
1,794.00
1,310.99
(26.92%)
BBSI
1,767.50
2,572.48
45.54%
401k and Precious Metals
My 401k is through my current employer and actively receives contributions. The 401k consists of a Blackrock Target Date Fund (which is no longer being funded), and the Oakmark Fund. The Oakmark Fund is a large cap value fund. Since I am actively contributing to my 401k, it will naturally have a growing influence on my portfolio.
I also have a decent allocation to precious metals that are used as a bond substitute, recession and inflation hedge. This quarter, I added 100 units of iShares Silver Trust (SLV) at a cost basis of $20.52 a unit. The table below shows the YTD performance for the precious metals and 401k, which includes the effects of contributions.
12/31/20
9/30/21
YTD Gain (Loss)
YTD Contributions
Precious Metals
9,964.00
9,682.04
-6.84%
2,054
401k
32,252.43
54,845.18
21.91%
14,200.00
Books I’m Reading
This quarter I read “Kochland: The Secret History of Koch Industries and Corporate Power in America”. Prior to reading the book, I was not too familiar with the Koch brothers besides them controlling the largest private company in the country, them being libertarians, and that they are controversial. This book covers the history of Koch Industries, Charles Koch’s management philosophy, various Koch Industry scandals, and Charles Koch’s lobbying machine. Kochland has a somewhat negative bias against Charles Koch, which I kind of knew before reading, so the negative portrayal did not bother me.
Much of the book consisted of explaining how Koch Industries went into a new line of business, then some crises happened in that new business, then presenting 1st hand accounts from key people navigating said crisis. This process repeated several times. The book did provide a good overview of the history of the company. I wish it provided more financial data, but apparently Koch Industries is extremely secretive so that info is not usually released.
The chapters on Charles Koch’s political network were very interesting. I was not aware of how impactful Koch’s lobbying groups were at amplifying the Tea Party movement, blocking climate legislation, and meddling with Trump’s tax plan. Overall the book was quite the page turner, I just might seek out other books on Koch Industries to get an additional perspective.
For Q2 2021, the portfolio is up 6.37%, and up 18% YTD. The Q2 starting balance was $132,799.55, and finished the quarter at $144,722.98. Contributions to the portfolio during the quarter amount to $3,386.
A few new positions were added this quarter in the deep value category. These include Biogen, MSG Networks, Investors Title Co, Quidel, and B2Gold. Additionally, Richardson Electronics was sold for a gain.
The current allocation of the portfolio is shown in the chart below. Currently, the portfolio consists of discretionary value stocks, oil tankers, deep value, 401k stocks, precious metals, and cash. It can be seen that 72.1% of the portfolio is in stocks, while 27.9% is in cash and safe haven assets.
During the quarter I received $587.72 total in dividends, which is broken down in the table below. It should be noted that FutureFuel paid a special dividend in addition to their normal dividend, which amounted to $345.
Ticker
Quarterly Dividend
FF
353.28
STNG
6.80
FE
48.75
DHT
8.60
BTG
19.04
ITIC
5.52
BBSI
21.00
EMR
42.93
COF
22.00
SPG
59.80
Total
587.72
Discretionary Summary
Discretionary value is the label I’m giving to the positions that are fairly large (~5% of the portfolio) I believe are undervalued and may have the following characteristics: quality business, competitive advantage, misunderstood by the market, or a good company in a heavily sold off industry. The current discretionary value stocks I own consist of Capital One Financial (COF), Emerson Electric (EMR), Simon Property Group (SPG), and FirstEnergy (FE). The table below shows the cost basis, current value, and gains/losses for these positions.
Recently, FirstEnergy announced a deferred prosecution agreement with the DOJ. This will probably result in a fine, and hopefully the scandal will be put to rest. The Fed released the results of their latest bank stress test. Capital One was one of the strongest performers in the stress test, meaning. COF has plenty of excess capital to weather a storm. Or since it appears things are returning to normal, hopefully Capital One can return some of this cash to shareholders.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
COF
63.25
3,478.75
8,507.95
144.57%
EMR
41.00
3,485.00
8,180.40
134.73%
SPG
74.50
3,427.00
6,002.08
75.14%
FE
28.00
3,500.00
4,651.25
32.89%
Tanker Stocks
Tankers have slightly improved this quarter, but are still a sore point in my portfolio. I wouldn’t be opposed to selling these stocks. However, I don’t have any better ideas, I already have a large cash position, and there is some hope they will work out in the medium term.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
DHT
8.17
1,755.90
1,395.35
-20.53%
FRO
10.66
1,738.29
1,467.00
-15.60%
STNG
26.63
1,742.67
1,499.40
-13.96%
TNK
23.86
1,765.88
1,067.08
-39.57%
Deep Value
Deep value is a sub-strategy I’m employing in my portfolio. This is a quantitative strategy that buys a basket of statistically cheap stocks. The metric I use is EV/EBIT, based on the wonderful book The Acquirers Multiple. Historically, this strategy has provided excellent returns, although it has not kept up with the S&P 500 the past few years. Additionally, I am making an effort to apply this strategy to microcap companies. Microcaps are classified as having a market capitalization between $50M-300M. These small companies are more volatile, but have the potential for attractive returns.
My position sizing is smaller than the discretionary side of my portfolio because I want to own a basket of about 20 stocks. Since this is a quantitative strategy, I do not spend much time analyzing these businesses. The main idea is that these companies are trading at very cheap valuations, and the winners will (hopefully) outnumber the losers.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
BIIB
275.00
2,475.00
3,116.43
25.91%
BTG
5.25
2,499.00
2,003.96
-19.81
FF
13.00
1,794.00
1,324.80
-26.15%
HXL
36.80
1,803.20
3,057.60
69.56%
ITIC
164.54
1,974.48
2,095.56
6.13%
MSGN
16.00
2,000.00
1,822.50
-8.88
QDEL
120.00
2,520.00
2,690.52
6.77%
RSKIA
8.25
1,740.75
2,743.00
57.57%
Since I sold some deep value stocks last quarter, I used the proceeds to buy a few new companies this quarter. The new additions are Biogen (BIIB), B2Gold (BTG), Investors Title Co (ITIC), MSG Networks (MSGN), and Quidel (QDEL). Some of the remaining deep value picks, such as FF and RKIA, are coming to their one year anniversary so they will probably be sold next quarter. Finally, Richardson Electronics was sold this quarter for a nice gain.
Cost Basis
Sale Proceeds
Realized Gain (Loss)
RELL
1,802.25
2,997.32
66.31%
401k and Precious Metals
My 401k is through my current employer and actively receives contributions. The 401k consists of a Blackrock Target Date Fund (which is no longer being funded), and the Oakmark Fund. The Oakmark Fund is a large cap value fund. Since I am actively contributing to my 401k, it will naturally have a growing influence on my portfolio.
I also have a decent allocation to precious metals that are used as a bond substitute, recession and inflation hedge. The table below shows the YTD performance for the precious metals and 401k, which includes the effects of contributions.
12/31/20
6/30/21
YTD Gain (Loss)
YTD Contributions
Precious Metals
9,964.00
9,682.04
-2.83%
401k
32,252.43
49,930.84
19.68%
10,252.00
Books I’m Reading
One of my recent reads was “The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60’s”. I was looking for a market history book that covered the 1960’s market boom, then the stagflation bear market of the 70’s. A part of me feels like history is repeating, so I was interested in learning more about this time period and I’ve heard this book mentioned before. Unfortunately, Go-Go Years does not cover the high inflation of the 1970’s. It is mostly focused on the 60’s and ends with the recession in 1970. Despite this, the book was still quite interesting because I was not aware of all the stock market drama going on in the 1960’s.
The book starts off early in the decade, painting the picture of a market moved by individuals instead of institutions. Then the growth mutual funds pioneered by George Tsai, and copied by many, took advantage of the technology companies of the day. Conglomerates became a new phenomenon with Textron, Litton Industries, Gulf+Western and the like. Financial engineering and shoddy accounting was spreading throughout corporate America. Go-Go Years culminated with the 1970 recession that crushed the overleveraged stock brokerage industry. This era does not get mentioned as much as 1929 or 2008, but if you enjoy market history, Go-Go Years is a good read.
The second book I read this quarter was the personal finance classic “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy”. I thought I knew the gist of the book, “live below your means and invest”, but Millionaire Next Door presented some interesting information that made it an enjoyable read. Many of the millionaires profiled in the book come from humble, or even poor beginnings, yet they build a small company, save, and invest. The example millionaires were frugal, but to my surprise, they didn’t drive 15 year old Honda Civics. The authors’ surveys found that many of the self made millionaires bought newer cars, they just bought Cadillac’s and Ford Explorers instead of high end BMW’s. A big theme of the book was that you can have a high income, but if you spend it all on status items you can look rich but actually have little net worth. Now whenever I think about making a big purchase, I’ll ask myself “What would a millionaire next door do?”.
This past February marks the third anniversary of my first individual stock purchase. Since then, the market has been pretty boring, with record low volatility. There were a few times of drama, like the inverse VIX blow up and the market selloff Q4 2018. By the time stocks were starting to get affordable in these sell offs, the market changed course and ripped higher. Now the market is in a period of turmoil, understandably so with this pandemic crisis. With this apparent bear market, I wanted to provide my thoughts on what’s going on, and document my buys, sells, and performance on this blog.
Before I publish future posts on what stocks I’m analyzing, or how I’m allocating my portfolio, I wanted to give some background on my investing activities. So far, my portfolio has held up decent during this sell off. However, I am massively overhauling my portfolio towards value stocks. This post aims to show my past thought process for my allocation, and the changes I’m making going forward.
Past
My portfolio is currently a hodgepodge of funds and asset classes, but at one point it made sense. The allocation I was aiming for consisted of not just diversifying across a large number of stocks, but diversifying across asset classes. Multiple asset classes can help protect the portfolio through all scenarios, such as a rising or falling stock market, and a rising and falling interest rate environment. The target allocation was to split the portfolio into stocks, emerging markets (EM), commodities, and money market (MM). The rough percentage allocation I was going for is shown in the figure. These positions were spread across a 403(b) (401(k) for public employees), Roth IRA, and taxable brokerage accounts.
The stock portion of the portfolio was primarily focused on buying individual stocks through a Roth IRA and taxable account. My philosophy on stocks firmly falls into the value investing category. The stocks I bought were generally quality, low debt companies that I believed had some sort of competitive advantage. February 2017 was the beginning of my stock picking foray, and lasted until mid 2019 where I wound down my positions to buy a house.
In February of 2019, I started a new job, which provided a 401(k). The default allocation was a target date fund that I assume is mostly in US stocks. Since I was lazy, I didn’t change the allocation, so this stock allocation has steadily increased. While a large chunk of my investments are in the 403(b), this 401(k) will march on to eventually have a more important role in my portfolio.
The next stock allocation was in the form of emerging markets. At the time the S&P 500 appeared overvalued, so I was looking for alternatives. Emerging market indexes were at a lower valuation than US stocks, which was compelling to me. Additionally there is the thesis that EM countries have younger demographics than the US, Europe, China and Japan. This younger population could drive higher GDP growth than the countries with a large aging population. With faster growing economies, these countries have the potential to offer better returns compared to expensive developed markets. While this thesis makes sense, I have become more skeptical, which I may elaborate further in a separate post.
Commodities were another asset class I wanted exposure to for diversification. The thought process for this was that commodity indexes were at historical lows compared to the S&P 500. While it is impossible to value commodities like you can with a business, they appeared cheap. The bullish case for commodities is a rise in inflation. I do not believe excessive 1970’s style inflation is heading our way, but it would be nice to allocate capital to something that should keep up with inflation. Another bull scenario was China’s One Belt One Road initiative, which would be the largest infrastructure project in the world. The demand for raw materials would cause commodities prices to rise. Given the current state of affairs with the world, I’m not quite sure how far One Belt One Road will get.
A specific commodity I wanted to allocate to were gold and silver. Gold is a controversial asset because gold bugs say the financial system is going to collapse with hyperinflation, and the only savior is gold. I don’t know about all that, but gold and silver are attractive to me because they are historically cheap compared to stocks, they keep up with inflation which is nice in a world of low bond yields, and they are a safe haven asset that should provide insurance during a bear market. My precious metal allocation is rather small, and if stocks crash and metals go up, I would sell my stake to buy stocks.
Finally I allocated a rather large portion of my portfolio to money market funds. These are like savings accounts that aim to protect your principal without any risk from equities or bonds. Since stocks were overvalued, I wanted to have a stash of capital that I can rotate into equities during the next recession. While some people oppose the idea of building cash reserves during expensive markets, this allocation cushioned my portfolio during the craziness going on in the markets right now.
My one regret is that maybe I should have allocated to bonds instead. At the time I thought it was pointless to own bonds with yields so low. Now that yields have gone to a crazy 0.5%, the capital gains on the bond allocation would have been very nice. I missed the boat on that trade, but it happens. Bond prices could continue to rally if rates go negative during this recession, or maybe some inflation will show up and put a hurt on bonds. For now, bonds just seem too hard.
The last component to my investing strategy is to apply a tail hedge strategy. The idea is to pay a small premium to hedge against low probability events such as a 20% market drop. This was performed by purchasing SPY put options that were 30% out of the money. If the market sharply fell, the option would greatly increase in price based on the underlying SPY price approaching the strike price. Volatility has a key role in option pricing as well, high volatility drives up the value of the put option.
12/31/19
3/27/20
Target Date
10962.24
11316.09
Money Market
22773.67
22779.8
EM
17675.3
13633.62
Commodity
13833.7
10125.48
Precious Metals
7861
8072.6
Total
$73,105.91
$65,927.59
Contributions
3177
Return
-13.80%
Present
As I mentioned previously, the value stock part of my portfolio was liquidated in 2019. I should have reorganized my portfolio, but I never got around to it. Therefore my portfolio was kind of ugly going into the COVID19 crisis. After calculating my returns from the end of December 2019 to now, my hodgepodge portfolio still held up decently. The table below shows the market value of my portfolio holdings from the end of 2019 to present. My 401k contributions are included for clarity and are factored into the return calculation. At the 401k/403b level, my portfolio has returned -16% YTD.
This performance comparison leaves out the contribution of my tail hedge strategy. As the market began to violently react to the realities of this pandemic, I sold my put options on 2/28/20. In hindsight I was early, but the hedge did its job and I wanted to capture the gains while I could. The cost of the SPY puts were about $600 and the proceeds were $10,148. Year to date I spent $313 on SPY puts, plus I had some left over from 2019.
With this $10,000 windfall, I had the daunting task of finding good opportunities to reinvest in. The turmoil is not causing me stress (so far), but I do feel unprepared since I am lacking a list of companies I’d like to buy at the right price. My modus operandi has been to find quality stocks trading at attractive free cash flow yields. I’m trying to tactfully make purchases since I don’t want to use up all my ammo before the market bottoms out.
The three stocks I’ve bought so far are Capital One (COF), Simon Property Group (SPG), and Emerson Electric (EMR). The table shows my cost basis and current market value. I don’t want to go into my thought process on these stocks right now, I’ll do that in a separate write up. During this volatility, I fully expect a period of trying to catch falling knives. So far, the performance of my new acquisitions are reflecting that. However, my time horizon for these stocks are several years, maybe indefinitely, so I’m not worried about temporary deterioration in business fundamentals or price moves.
Company
Ticker
Cost Basis
Market Value
Change
Capital One Financial
COF
3,478.75
3,041.50
-12.57%
Simon Property Group
SPG
3,427.00
2,675.82
-21.92%
Emerson Electric
EMR
3,485.00
3,874.30
11.17%
Factoring in my retirement accounts, and the reinvestment of my tail hedge, a breakdown of the portfolio is shown in the table. The total is the sum of the portfolio values at the specified dates, while the return takes into account the 401k contributions and cash infusion into the portfolio. In total, my portfolio is down 2% YTD compared to the S&P 500 being down 21%.
12/31/19
3/27/20
Target Date
10962.24
11316.09
Money Market
22773.67
22779.8
EM
17675.3
13633.62
Commodity
13833.7
10125.48
Precious Metals
7861
8072.6
SPY Put
192.5
0
Stock
0
9591.62
Cash
0
1976
Total
$73,298.41
$77,495.21
Contributions
5677
Return
-1.9%
Future
As this pandemic and market turmoil continues, I’m trying to figure out my investing plan. While still maintaining a decent amount of emergency savings, I want to deploy some of my current and future savings into buying value stocks.
One of my first tasks is to reorganize my retirement accounts. The first action I did was to review what value funds are available in my 401(k). Based on the options, I’m going with Bill Nygren’s Oakmark Fund instead of the current target date. As for my 403(b), I’ve been procrastinating on going through the IRA rollover process. Once this is complete, the largest chunk of my portfolio will be able to be invested however I want, instead of the few funds available by the provider. Instead of the multi-asset class portfolio, I’m going to focus this IRA rollover on either individual value picks, or some value ETFs such as ZIG or QVAL.
The kind of stocks I’m looking for are quality, low debt companies at attractive cash flow yields. I’d love to find a great brand or consumer defensive company at a good price. So far these stocks aren’t cheap enough for my liking. Statistically cheap deep value stocks are an alternative if I can not find companies that fit my criteria. And of course, I could always buy some Berkshire.
Alternatively, I may pivot to Ben Graham net-nets. Right now it is difficult to foresee what the human toll, let alone the economic damage of this pandemic. If the effects cause a deep, but V-shaped recovery, then it may be wise to buy quality companies at bargain prices. On the flip side, if it turns out the economy is being shut down for months, we could be looking at the worst economic conditions since the Great Depression. In this scenario I may want to shift my focus to buying companies below their liquidation value. This may provide the best margin of safety in these highly uncertain times.
It’s taken me too long to get the wheels moving for my investing blog, but finally here we are. With the market turmoil stemming from the COVID19 crisis, I decided to expedite setting up the blog to document my thoughts and actions. This site is still work in progress, as I try to keep up with the market craziness, put out content, and learn the ropes of setting up a blog. While I have many plans for the types of content I’d like to publish, for the near term you can expect:
My thought process on the stocks I’m buying during this draw down
Updates on the performance of my portfolio
Sharing how I’m navigating, and trying to remain rational during this market volatility
I hope my content proves to be a useful contribution to the value investing community. Let me know what you think!
